Mexico: The “business reason” in the Mexican tax law

It has become common practice for Mexican tax authorities to reject the deductibility of taxpayers' transactions based on an alleged lack of business reason of such operations. The SAT (the Mexican tax administration service) has found in this supposed business purpose an excuse to easily deny tax refunds and other valid operations of taxpayers without properly explaining what constitutes a valid "business reason", or how to prove that a given transaction actually had a business purpose.

It should be noticed that the Mexican law contains no provision defining the concept of a business reason, nor in which situations tax authorities are allowed to apply it, deriving in arbitrary rulings, tax refund denials or unjustified tax assessments by the SAT.

This is relevant especially in international transactions, where the rejection of a deduction consisting of a payment made abroad by a Mexican company to either a related or a non-related party will cause a double taxation scenario, regardless if the payment is made to a company residing in a tax treaty partner jurisdiction.

What is understood as a "business reason"?

As mentioned above, since the term "business reason" has no legal basis. Its interpretation depends on the tax authorities criteria in a case-by-case scenario. This discussion already reached the Supreme Court of Justice, which vaguely accepted the use of this principle by tax authorities for the specific cases discussed before the court.

Nevertheless, in Mexico, we still do not have any existing legal provision that describes or provides a proper meaning of what is to be understood as a "business reason" or the different features that the taxpayer should rely on in order to evidence the compliance with such a principle. At present, we only have non-binding criteria from the Mexican tax ombudsman and the above-mentioned decisions from the federal courts that state that whenever the tax authorities use the aforementioned concept, taxpayers will have to prove before such federal courts that their transactions had a business motive.

Therefore, Mexican taxpayers still do not have any legal certainty regarding the tax authorities' powers to use and apply this "business reason" concept, which clearly represents an additional and unnecessary burden for Mexican taxpayers. This situation continuously forces them to prove that they are indeed doing lawful activities that comply with the Mexican laws, even when the authorities do not have any legal basis to question their operations.

In order to provide legal and tax treaty certainty, such a concept should be included and described in legislation because, the mere use of it has a clear negative impact on such resolutions.

Further tax reforms will tell us if this arbitrariness ends or remains.

Hernaldo Vega

Arianna Aguirre

Hernaldo Vega (hevega@deloittemx.com) and Arianna Aguirre (araguirre@deloittemx.com)
Deloitte
Website: www.deloitte.com/mx

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